Whitney Tilson Explains His Short Position in Lululemon Athletica (LULU) ~ market folly

Friday, April 23, 2010

Whitney Tilson Explains His Short Position in Lululemon Athletica (LULU)

Hedge fund manager Whitney Tilson of T2 Partners recently was interviewed by Forbes and we wanted to quickly highlight his thoughts. In the past we've covered Tilson's short positions and we highlight them because, let's face it, not many funds talk about their short books openly. Short positions are almost treated as holy grail and are often kept guarded closely to the vest. So, we like to highlight any rationale whenever we can. We've of course covered Tilson numerous times on the site and you can hear his investment ideas at the upcoming Value Investing Congress as well.

While shorts in general have not performed well due to the ever-rising equity markets of today, you'll recall that Tilson has found success with his short position in Palm (PALM). We've covered some of T2's short positions here as well. We'll have to see if he's found another winner in shares of Lululemon Athletica (LULU).

From his Forbes interview, Tilson says of his LULU short:

"Generally speaking, many dicey companies have run up a lot over the past year and our short book has hurt us a lot because everything's been running (but we've still done very well because our long book is bigger than our short book). It is both a very attractive but also very tough environment for shorting. By that I mean that there are a lot of overpriced stocks out there.

However, they've been overpriced for months and they keep going up because there's so much liquidity sloshing around. Also there's a lot of momentum in some of these stocks that's running them up. A good example is a company that makes yoga apparel called Lululemon Athletica. They have a nice little niche and they're growing rapidly--their apparel is hot and margins are very high. But it's trading at an extreme valuation and it looks like a fad to me--It's yoga clothing! We think the fad could pass and are quite certain that the valuation is extreme.

The stock is today at right now as I speak at $43.66. It bottomed in March of '09 below $5. So the stock's gone from there to almost $45 and has a $3.1 billion market cap. Its trailing 12 month earnings through January 2010 were 82 cents a share, so it's trading at close to 54 times earnings. And even if you believe analysts' estimates for their year ending January 2011, it's trading at 41 times."

It's always good to get a manager's perspective on their short positions. In addition to his Palm and Lululemon shorts, we also know that Tilson is still short Moody's (MCO), the ratings agency that has somewhat come under fire as of late. For more insight from Tilson, keep in mind that you can hear his investment ideas at the upcoming Value Investing Congress in California next month.

Taken from Google Finance, Lululemon Athletica is "a designer and retailer of technical athletic apparel primarily in North America. Its yoga-inspired apparel is marketed under the lululemon athletica brand name. The Company offers a line of apparel and accessories, including fitness pants, shorts, tops and jackets designed for athletic pursuits, such as yoga, running and general fitness."

In the past we've also posted up some of hedge fund T2 Partners' other short positions here and then previously here as well.

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